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Four Percent Rule

The four percent rule, in the simplest of terms, and helps in determining the amount of funds that a retired person should withdraw from their retirement account every year. The rule helps a retiree to have a constant stream of funds, by also allowing an account number that will permit funds to be withdrawn for a couple of years. According to experts, four percent is a very safe rate because the withdrawals consist of dividends and interest. It is advised that the withdrawal rate remain constant, though it can be tweaked according to the inflation rates.

Understanding the Four Percent Rule

The four percent rule helps retirees and financial experts to limit their financial portfolio’s withdrawal rate. In order to comprehend the sustainability of the rate, it is important to take the life expectancy of an individual into account. The reason behind this is that people, who will live for longer, will need to have a portfolio that will last them for a longer time. One must also keep into mind that as a person grows older, their expenses and medical costs also increase.

How the Four Percent Rule Can Work For You

There are a number of variables involved when it comes to understanding the four percent rule. In order to make it work, people need to make a few adjustments. Here’s how:

Don't Change All Your Savings into Bonds

You should have a diverse portfolio, and keep at least some of the assets in stocks, so that your assets grow with the passage of time. It is recommended that you have a 60-40 split between stocks and bonds.

Stay Diverse to Reduce Risk

It is wise to invest in international stocks in order to stay diverse, and to boost the returns. A globally diverse portfolio reduces risk as well, which is great.

Don't Overspend

There will be times when you will get greater returns. It is important to stick to the plan, and resist the urge to overspend so that you can limit yourself to the discipline.

Take the Help of a Financial Advisor

A financial advisor can help you in understanding what withdrawal strategy will work best for you.


Further Reading


The case for four percent inflation
www.econstor.eu [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

Beyond the Four Percent Solution: explaining the consequences of China's riseBeyond the Four Percent Solution: explaining the consequences of China's rise
www.tandfonline.com [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

The 4 percent rule is not safe in a low-yield worldThe 4 percent rule is not safe in a low-yield world
papers.ssrn.com [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

Fiscal rules: Theoretical issues and historical experiencesFiscal rules: Theoretical issues and historical experiences
www.nber.org [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

Economic and monetary union in EuropeEconomic and monetary union in Europe
www.aeaweb.org [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

Restraining yourself: the implications of fiscal rules for economic stabilizationRestraining yourself: the implications of fiscal rules for economic stabilization
link.springer.com [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

Keeping it simple: Financial literacy and rules of thumbKeeping it simple: Financial literacy and rules of thumb
www.aeaweb.org [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …

The “five percent rule” for improved water service: can households afford more?The “five percent rule” for improved water service: can households afford more?
www.sciencedirect.com [PDF]
… A smaller shock might have pushed the Taylor-rule interest rate to -2% or -3 … To justify a four percent inflation target, we must weigh the benefits of this policy against the … Their Inflation Targets in Light of the Zero Lower Bound?" Review of Economic Studies, 79(4)(2012): 1371 …



Q&A About Four Percent Rule


How do you make adjustments when using the Four Percent Rule?

You make adjustments by having a diverse portfolio with stocks and bonds, staying globally diversified, getting greater returns sometimes but sticking with plan and resisting urge to overspend so that you can limit yourself to discipline.

How does one calculate the amount of funds that a retiree should withdraw from their retirement accounts every year?

One calculates this by dividing 4% by your life expectancy.

What are some variables involved with understanding the four percent rule?

There are many variables involved, such as having a diverse portfolio, keeping at least some assets in stocks so that assets grow over time, investing internationally to stay diverse and boost returns, having times where you get greater returns but sticking to plan and resisting urge to overspend so that you can limit yourself to discipline.

Who can use the four percent rule?

Anyone who is retired and has a retirement account can use the four percent rule.

What is the four percent rule?

The four percent rule helps retirees to determine how much they should withdraw from their retirement account every year.

Why is it important to take life expectancy into consideration when using the four percent rule?

It's important because people who live longer will need more money in order to last them for a longer period of time.

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